Why Do You Need a Non-Leveraged Core Position in Precious Metals?

The answer to this rhetorical question is found in the market manipulation seen last night in silver. Those in the paper pits using leverage and short-term instruments to play the metals game can get wiped out in a flash. Trust me, I've got first hand experience. Read this post by Dave In Denver at the Golden Truth to get the gist of the most recent blatant "take down" in silver during thin overnight electronic market trading while many overseas markets were closed.

This is not tin foil hat conspiracy, this is how the casino works. The house has to always win, on balance. And when they don't, the government steps in and bails the house out with your purchasing power. It's sick and it's wrong and yet it's how the world works (and has for centuries). And no, it's not limited to the precious metals markets, but these are politically important to the status quo. "Gold is the enemy," at least according to Paul Volker and Alan Greenspan back before he became an integral part of the machine.

The point is that no one can shake that physical metal out of your hands by playing tricks with the paper price. I am not saying don't engage in trading (now THAT would be a case of the pot calling the kettle black!). Many of us are speculators because we live in a fiat world gone mad and there are few options left to protect purchasing power in this environment. Speculation always runs rampant in societies caught in the throes of a dying fiat currency. The decline of the American Empire is not unique or even special in this regard. Excessive debt associated with military imperialism - nothing new in that recipe! Does anyone actually believe that we will now reduce the number of troops in Afghanistan now that we have supposedly killed the Mythical Boogeyman? At least I think Osama bin Laden was the reason we started an undeclared war in Afghanistan (in true Orwellian fashion, it's getting harder and harder to remember exactly why Eurasia went to war with Oceania).

Anyhoo, make sure you have a solid core position in physical metal before you start throwing chips onto the electronic trading casino table. My metal of choice is Gold, but I own a little silver and I respect those who prefer silver, platinum and/or palladium. To me, Gold is the no-brainer, safe investment for the next several years. It has lower risk than other precious metals, but this means it has a lower potential reward. For most mortals, holding physical metal will yield greater gains than speculating on short-term price fluctuations in metals or metal stocks. Much like Las Vegas, the stories of those few who won big keep the moths coming back to the flame (including this not-humble-enough moth).

A series of significant margin hikes in silver coupled with an intentional smack down in its price during thin trading turned lucrative profits into margin calls for several retail traders last night. Wash. Rinse. Repeat. Don't play with dynamite unless you're ready to get blown up.

In the long run, last night's shenanigans will be nothing but a nearly imperceptible blip on a long-term chart of the bull market in silver. Those who got burned will look back and curse themselves for being so aggressive at such an overextended price point. Like the tortoise and the hare, 95% of the speculators (the hares) will be surpassed by physical metal owners (the tortoises) who are happy to just ride the bull at its own pace. And those who own paper metal as their core holding are also playing with a form of fire, as the rules of ETFs and ETNs are subject to change without notice and their counter party risk is increasing exponentially as this secular general equity and real estate bear market for the ages continues to grind onwards.

I still play poker with the sharks using a portion of my savings, but with a jaundiced eye and an itchy trigger finger that has learned to take losses quickly. I now watch the paper shenanigans with a mix of amusement and sadness. As a [temporary?] Goldbug, I know I have to be careful what I wish for in this environment. There are no easy ways out of the mess America and other "advanced" economies have created for themselves. Life will go on and people will survive, thrive and have fun in the mean time. Doomsday scenarios have no place in a serious investor's vision of the future, as investing is a waste of time if the "end" is near. I'm all for survival skills and being prepared for temporary chaos, but this to me is not investing (i.e. not really a financial topic).

Own physical metal if you are interested in the precious metals space. Once you have accumulated a comfortable "nest egg" in physical metal, whatever that means to you, then go ahead and speculate if that's your thing - whether it be via leverage, short-term paper trading and/or dabbling in junior metals stocks. There is plenty of money left to be made in the current secular Gold bull market, which promises to be one for the ages. Don't be the hog that gets slaughtered when it's so risk-free to be the bull that makes money.

Having said all this, I'm buying the freakin' dip tomorrow if silver goes down any further using the AGQ double bull paper silver ETF in my speculative account for a short-term trade...

;]

Gold - Jumping the Track Or Reaching a Routine Target?

When looking at longer time frames using technical analysis/charting, it is often appropriate to use a log scale price chart versus using a linear scale price chart for shorter-term time frames. But at what exact time frame should you switch from a log scale chart to a linear scale chart and what are the exceptions? Well, the answer is that we are dealing with art as much as science when using technical analysis.

But while doing my weekly exercise in charting the Gold universe, I found an interesting discrepancy in the Gold chart between its current price level and its prior speculative price peaks earlier in the secular Gold bull market. As an aside, the secular Gold bull market is far from over, so these are only short-term considerations. However, these charting issues could have quite profitable short-term implications for those riding the Golden bull.

Without further ado, here are the charts that have me intrigued. First, a log scale chart over the last 7 years of this Gold secular bull market ($GOLD) thru Friday's close:



Great news and it means we have plenty of upside potential left for the current Gold run. However, the linear scale chart over the same 7 year period demonstrates an interesting and slightly different trend line situation:



So, which chart is correct? Are we heading to a routine price target or jumping the shark and entering a more aggressive phase of the Gold bull market? The answer, I believe, is the latter. I base this partly on the recent action in silver, which has far outperformed Gold over the past year. Here is the linear scale chart of silver ($SILVER) over the same past seven years:



Obviously, silver is in a new linear trend, but it presumably would stop at it's log scale trend line - or would it? Here's the log scale chart of silver over the past 7 years:



The "hot" money has made a boatload of cash in silver and there's likely still more to be made in this intermediate term run for the white metal. However, rotation of speculative money into Gold has likely begun and things could be just starting to heat up. As Sinclair has been saying, $1650 is in the bag for this run. However, could we also be looking at jumping the log scale trend line on this move like silver has done?

It certainly feels like the right time during this bull market in Gold for the transition to begin. The log scale trend line in Gold is likely to result in short-term profit taking as the linear scale trend line did in silver. However, I think it would be just another buying opportunity if it happened.

When the Dow to Gold ratio gets below 2, then I might consider starting to look around for other investment opportunities and selling some physical Gold. When I do sell some Gold, it will likely be in order to buy Gold stocks with the proceeds, which will likely peak after the Dow to Gold ratio bottoms (as they did in the previous two cycle nadirs in the Dow to Gold ratio). Until then, I'm just going to keep enjoying the ride in Gold.

Japan versus USA: Same Depression with a Lag

Charts speak more eloquently than I can and they speak a brutal truth. Perhaps it is my scientific background or perhaps I appreciate the art that can be found in price charts. In either case, I prefer the message of charts to CNBC blowhards and other so-called experts.

Anyone who currently has excess savings they want to invest is in the minority of the world's population. They are also likely "rich" and "evil" according to populist sentiment. In any case, these aren't the best of times for advanced/Western economies.

We are currently in the midst of an unmistakable secular bear market for general equities in the United States. Such bear markets don't end with the current obscene valuations and they don't end because government saves the day. If it were only true, writing everyone a check for $700 billion dollars (i.e. treating everyone like a Wall Street bank) would bring endless prosperity and create an endless bull market.

The piper waits patiently, knowing that he will be paid. Currency debasement and allowing survival of the most unfit is not the way to restore a secular bull market. Ask Japan how QE1, QE2, and QE3 helped their stock market for the long haul.

Speaking of Japan, do you realize that we are on a similar course when stock markets are priced in Gold? I am not saying deflation or inflation, I am saying "priced in Gold." Only Gold bulls are used to such pricing strategies, but it is time for reality to intrude on the paperbug world.

Whatever monetary chaos we are in store for, Gold will outperform stocks over the next several years. This is open for debate in my mind as much as the question of whether fiat money will retain its value over the next decade is open for debate. Believe what you will.

But notice the "phase shift" chart message between Japan and the USA shown below. The chart is a monthly log scale chart of the Nikkei stock index ($NIKK, the main Japanese stock index) divided by the price of Gold ($NIKK:$GOLD), shown in a black and red candlestick format, versus the Dow to Gold ratio ($INDU:$GOLD), shown in a black line format:



Same chart with a phase shift, no? The corrections in this ratio lasted longer for Japan because they entered their secular depression when everyone else's economy was booming. We don't have that luxury, so our corrections in the Dow to Gold ratio have been shorter. We are about to begin the biggest leg down in this ratio since the "secular bear market" in this ratio began in 1999. This is not a drill and this is not a call for the end of the world. Be careful out there if you're not in the precious metals sector.

The End of the Road

For kicking the can down the relative road, that is. The Dow to Gold ratio is getting set to expose the insanity and reward those willing and able to fade the "don't worry, be happy" herd. I am not necessarily talking about nominal wealth, although that seems the most likely path, but rather relative wealth. When you live in a world with Monopoly money, nominal gains aren't always what they're cracked up to be. If the Dow hits 20,000 and gasoline is $10/gallon (as it is approaching in Europe), the herd will be poorer and not necessarily understand why. But you, dear sir or madam, are hopefully a precious metals investor and not a paperbug.

What I am speaking of is becoming richer in stock, bond and real estate terms. In other words, the scoreboard proffered by CNBC and generally preferred by "old" money. The best thing about thinking in this manner is that your investments will prosper in spite of (and partially because of) the ridiculous whims of the apparatchiks, who are only following the script laid out for them by previous empires in decline. You also can ignore the inflation versus deflation debate if you think in relative terms, as Gold will thrive in any of the potential chaotic monetary situations that develop. Those expecting the end of the world and total economic collapse are likely to remain frustrated. After all, did Icelanders starve to death once the bankstaz cut them off (or was it the other way around?) and their markets and currency were shunned?

I cannot speak adequately to those in the Gold and silver crowd looking for the end of the world, as I am too optimistic to concern myself with such scenarios. After all, who gives a shit about investing if we are all doomed? In the 1930s and 1970s, did guns and a log cabin work better or did investing in Gold and Gold stocks and staying nimble? To me, it is just the swinging pendulum of history. And forgive me for not mentioning silver enough in the past, as I am one of the ones who misjudged silver's massive intermediate-term potential. Oops...

Anyhoo, the topic currently is the Dow to Gold ratio and the pending disaster in this ratio for the Wall Street crowd. Of course, Soros, Paulson and other smarter sharks are already positioned for the move and waiting patiently for the Western herd to wake up (the Eastern herds have been awake for some time). The average money manager, on the other hand, is not prepared for the storm about to strike in the Dow to Gold ratio, which will soon become a fairly mainstream concept and a self-fulfilling prophecy. The question is not "will we really reach 2 in this ratio?" but rather will we potentially hit 1 or even less than one in this ratio?

I love charts and their messages, as I trust them more than the words of the latest guru (present company excluded, as I love to hear myself talk...). Without further ado, here is the most important secular chart I know of for those who have the capacity for independent thought and who understand the concept of relative wealth. Following is a 41 year monthly chart of the Dow to Gold ratio using a log scale:



Becoming 4 to 8 times wealthier in terms of the amount of common stocks you can buy at a time when common equities are likely to finally be cheap and provide a decent dividend yield is a massive shift in relative wealth for the average person. In other words, it is far from too late to join the precious metals party. Also, please remember that Gold stocks have made some of their largest intermediate term gains AFTER the Dow to Gold ratio has bottomed in the previous two cycles (i.e. the 1930s and 1970s)!

This is not a get rich quick scheme. This is a get rich in relative terms scheme that may take a few years to play out. Secular equity bear markets, which correspond with a falling Dow to Gold ratio, usually take less time than the bull markets that precede them, but Japan's miracle 1980s decade has yielded two decades of bear market so far and their massive equity bear market ain't over yet. I think 5 years is the maximum time it will take to realize the completion of the current secular bull market in Gold and nadir in the Dow to Gold ratio. However, I do not know the future any more than you do (though I must like to think so enough to bore you with my opinions).

Good luck out there. Hold onto your precious metals investments. We will likely see a summer correction after some further bullish spring fireworks in the sector dedicated to things shiny and precious, but these are shorter term considerations and predictions in this time frame are even more unreliable than longer term predictions, as I have discovered the hard way. I remain long via physical Gold (and a little silver) and GDXJ ETF long-term LEAP option calls that expire in January 2013. I think I may start posting again sporadically on my blog. If you have the interest, stop by and let me know you're out there reading.

Scaling In and Signing Off

Scaled into long-term, near-the-money GDXJ calls with an expiration date of 2013 heavily today.

I am signing off on the blog. 600 posts over a little more than 2 years - a lifetime in internet terms. I am lacking inspiration for new ways to say "buy Gold and Gold stocks and avoid general stocks, real estate and fiat currencies." Since my short term timing has been terrible over the past year, there is little point in potentially misleading others out there with an interest in precious metals. Buy the dips in shiny things and buy the dips in the companies that dig shiny things out of the ground.

I wish all speculators and investors good luck in trying to maintain the purchasing power of their savings.

If I feel I have something useful to say, I will attempt to publish it on the "standard" alternative investing sites (e.g., financialsense, safehaven, goldseek).

The Dow to Gold ratio will reach 2 and may well get below 1 this cycle. The mania phase of this current secular precious metals bull market is ahead of us and the naysayers ain't seen nuthin' yet. If the unconstitutional, non-federal, for profit, private federal reserve and our gubbamint insist on inflating their way out of this mess, 5 digit Gold is not at all an unreasonable proposition.

Best of luck!

GDXJ Now Offers Long-Term LEAP Options

As if recent price action in the Gold price wasn't enough, there is now a tantalizing play on the Gold miners available for speculators in the junior Gold patch. Long term options (LEAPS) on the GDXJ ETF that expire in January of 2012 and January of 2013 are now available.

I remain a patient watcher of the Gold market and am still largely on the sidelines when it comes to Gold miners. On the next decent spike down in Gold stocks, however, I will be loading the boat with 2013 LEAP option calls on GDXJ. What's holding me back right now is the chart of the ratio of Gold to Gold stocks (using $HUI:$GOLD as a proxy) and what I believe is a short-term bottom forming in the U.S. Dollar. Here's a 10.5 year chart of the $HUI:$GOLD ratio thru Friday's close:



I think we are in correction mode in the Gold patch, just what's needed to cool the sector off a little. I think the next thrust up is going to be big in the Gold patch and I think Gold stocks are going to outperform. I am hoping a good opportunity to buy Gold stocks and more physical Gold presents itself before the year is over. I remain bearish on general stocks/the stock market, but am eagerly anticipating putting every penny of my speculative trading money into 2013 expiration bullish call options on GDXJ. I will be sure to post when I start buying.

Due to some new interests that will keep me busy for a while, posting will remain sporadic. I remain a rabid Gold bull for the long term. The Dow to Gold ratio will reach 2 (and may well go below 1) before the current secular Gold bull market is over.

What Could Possibly Go Wrong?

One chart says it all (chart stolen from Market Harmonics):



There is no need for me to cheerlead in Gold, as everyone thinks this time is different and Gold is going straight to $2,000/oz. here. Perhaps it will. Wouldn't bother me a bit. Perhaps the stock market is going to new highs (that would bother me...). Perhaps hyperinflation has already begun but for the first time in history it is starting with bond yields at record secular lows. Perhaps Wall Street and Ber-spank-me can make stocks go up forever and at will.

Perhaps.

But perhaps this time isn't different. And perhaps the market is about to collapse. And perhaps the Dollar is about to stage a massive counter-trend rally that no one expects, just like in the spring of 2008 when everyone knew the dollar was going straight to zero.

I think we are set up for a 1937-style Dow / stock market collapse (chart stolen from sharelynx):



Everyone who though Ber-spank-me and widdle Timmy Geithner and the government would prop up markets forever in 2007 and 2008 now believes they are going to have better success this time around.

I own Gold because I believe we are in a deflationary depression and Kondratieff Winter. When apparatchiks try to "print" their way out (as they always do throughout history), the money simply makes it way into Gold, as there are no good macro-economic opportunities available to use all the money productively. There is always monetary inflation, but at this stage of the cycle, only Gold and Gold miners are poised to benefit from it. Though the rallies in risk assets have been fast, furious and at times relentless, another crash will make everyone remember where we are in the economic cycle. I'm just another guy with an opinion who isn't try to sell you anything, but I think we're set up for another massive market dislocation. Be careful out there.

Portugal - Gorgeous Bear Pennant

For those who care, sorry for being away so long. I have been pre-occupied with other interests recently. Posting is likely to be sporadic for a while.

Silver has gone parabolic on a short-term basis and Gold is breaking to new highs on a daily basis. Things are obviously frothy and overbought here and now is not a time to establish new longs in the precious metals sector. I am rather enjoying the ride, however, as I don't trade my physical Gold. We will remain in a bull market in precious metals until the Dow to Gold ratio hits 2 (and we may go below 1 this cycle). Gold is good, stocks are bad.

My "long physical Gold, short stocks" trade is only half working (oops). We are back into nosebleed sentiment territory (again) in paperbug land, and I remain stubbornly uber-bearish here on equities. My favorite technical chart right now is of Portugal's stock market (using $PTDOW as a proxy). Here's a 20 month daily candlestick chart of the action thru yesterday's close:



Robert Prechter mentioned on an interview the other day that a recent daily sentiment reading on the U.S. Dollar was 98% bears. Since all fiat is trash, I am still looking for a powerful rally in the Dollar relative to other paper promises, which will throw stocks and commodities into a steep correction. A stock market crash is absolutely still on the table and risk is very high in common equities right now

Mr. Market keeps telling me the same thing: stop playing in the casino, put your casino money into physical Gold (and a little into silver), and sleep well. Some day soon, I may just listen...

Revisiting My Gold Stock Buying Plan

I was wildly bullish on Gold stocks during this winter and spring. I am now in watchful waiting mode, waiting to accumulate Gold stocks at a cheaper price. I have been more focused on shorting the S&P 500 over the last few months, but I watch the Gold sector every day.

I don't trade physical Gold, but I am always looking to accumulate more on weakness if I have cash on hand. I don't own Gold miners, I trade them. I don't think buying and holding Gold miners is a bad idea at all this secular cycle, but I have chosen to buy and hold the Gold sector via physical metal and to trade the Gold sector using the miners. It is a personal choice, as we all must make when investing and managing our own money.

I "gave up" on the long Gold stock trade in May, when Gold stocks failed to show the strength relative to the metal price that I thought they would be showing if we were on the verge of a major cyclical bull thrust higher. I am bearish on equities in general, but Gold stocks can move higher despite a falling general stock market and have many times in the past. I am more concerned about the Gold miners' lack of relative strength compared to the Gold price than I am about a stock bear market.

I created my own thesis and "road map" for the anticipated Gold stock (as a sector) correction back in May. Since that time, the major Gold stock indices (i.e. $HUI, $XAU, GDX) have made a kind of triple top formation, while the junior sector, using GDXJ as a rough proxy, has broken about 5% higher than its May highs. In other words, pretty much sideways action, but the sector has not yet corrected as anticipated.

The point of corrections is either to "scare you out" (i.e. price plunge) and/or "wear you out" (i.e. take a long time moving little in either price direction). Of course with Gold stocks, even a "wear you out" correction can have 10-30% swings in either direction. C'est la vie in the Gold patch.

Only time will tell if my anticipated correction in the GDX ETF down to the 40 level will prove correct. For now, I am watching and waiting for a better opportunity in the Gold stock sector. Why? Because Gold stocks are still underperforming the Gold price, and this is corrective-type action in my opinion. Couple this with my uber-bearish outlook on the stock market right now and I continue to believe that Gold stocks are headed for a significant correction. This is not a bearish outlook, this is cash on the sidelines looking for a better entry point. I may get it, I may not (such are the risks of speculating). If I get it, I will be betting the family farm from the long side using long term LEAP-type options on GDX and potentially on a few individual miners. I also plan to go long GDXJ as well if I get my anticipated correction, but to a lesser extent since this ETF doesn't offer long term options.

Here is the chart that keeps me from being bullish on Gold miners right now, a 2 year daily chart of the $HUI mining index divided by the price of Gold (i.e. $HUI:$GOLD ratio chart):



This analysis is irrespective of the general stock market and stands on its own. Couple this with a "toppy" looking Gold chart (1 year daily $GOLD candlestick plot):



For those who can't see how Gold could possibly correct here, have you seen the latest Commitment of Traders chart for Gold futures (if not, check here)? Lots of paper chasin' momo hedgie quants in on the "long paper Gold" trade right now, just waiting to hit the sell button at the first sign of trouble.

I remain wildly bullish on Gold and Gold stocks for the long term. I remain wildly bearish on equity markets for the intermediate term. I remain in bored and watchful waiting mode when it comes to the Gold patch for the short term until I see a meaningful correction, which I am thinking (hoping?) will complete before the year does.

Deja Vu All Over Again

This chart should cause a sense of dread for all the retail investors left that are still still holding and hoping when it comes to general equities (chart stolen from a recent piece by Carl Swenlin):



Mutual fund managers, in aggregate, are like retail investors. There is no added value provided by these managers when reviewing this chart. Highest levels of cash occurred at the bottom, lowest levels of cash at the top. The August 2010 level is actually a record low percentage of cash over the past 5 years.

We are also set up to have a Volatility Index ($VIX) sell signal on stocks:



Equity put to call ratios remain at low levels for an equity bear market (i.e. levels that mark a stock market top, not a bottom). I think the current short squeeze will run out of steam this week, creating a significant top before a devastating plunge.

When it comes to Gold, I remain firmly committed to the long side via physical Gold that remains my largest holding. I am not interested in Gold stocks right now as I am skittish on all equities here. However, I am VERY bullish on Gold equities for the long term and hope to accumulate on weakness this fall. Gold stocks continue to underperform the metal, which keeps me in conservative mode and continues to make me think we are still in a consolidation phase for the short to intermediate term. I continue to think the U.S. Dollar is going to have another major rally to the upside this fall despite its horrible fundamentals.

I am still heavily short the S&P 500 via puts on the triple bullish UPRO ETF. The only changes I have made to this position are that I sold some puts as a hedge against my position and cashed this hedge out, using the proceeds to add to my short position on Friday. So, I am more net short now than I was a week ago.

When the mutual fund redemption requests start pouring in again on the next drop, mutual fund managers will have to sell significant amounts of stock due to their low cash positions. This, along with the lack of the uptick rule and the heavily computerized trading currently going on, will create an avalanche of selling this fall in my opinion. I think the herd will be forgetting about the confirmed Hindenberg Omen on the books at just the wrong time. Though I think we could have another up day or two this week, I am keeping my crash helmet on for the fall.